Inflator or Deflator

GLOBAL EQUITIES RESEARCH

With no surprise, the first round of the U.S.-China Strategic & Economic Dialogue didn’t bring any information about the dollar (it went below 1.42 EUR/USD yesterday).The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving. The United States will also reform its health care system with the aim of controlling rising health care costs for businesses and government while assuring high-quality, affordable health care for all Americans, and is committed to reducing the federal budget deficit relative to GDP to a sustainable level by 2013. China will continue to implement structural and macroeconomic policies to stimulate domestic demand and increase the contribution of consumption to GDP growth. China will further enhance access in its service market and expand areas and channels for non-government investment, with a view to expedite the development of its services industry and increase the share of services in GDP. China will also deepen social safety net reform, including strengthening its basic old-age insurance system and enterprise annuities.

The high inflation of the 1970s was partly the result of monetary policy blunders that will not be repeated, Janet Yellen, San Francisco Fed president, said on Tuesday. Taking questions after a speech to bankers in Coeur D'Alene, Idaho, Yellen termed the 1970s stagflation as a formative experience for her and most of her Federal Open Market Committee colleagues. Timing the reversal of the Fed's highly accommodative monetary policy will be difficult, but moves will likely come even while the employment market is weak, Yellen said. Earlier, Yellen said that full employment in the United States, or a jobless rate near 5 percent, would likely not return for several years

So, inflation or deflation? The recent steps by the Fed to pre-empt deflation have-ironically and unexpectedly- prompted a surge in inflation fearsboth inside the U.S. and abroad, especially in China; Specifically, the Fed’s measures to go beyond the stimulus inherent in a 0 % Fed Funds target rate by purchasing Treasury and Mortgage securities has conjured visions – especially in the eyes of major buyers of Treasury securities, China foremost- of massive money printing to underwrite trillion of dollars of additional government borrowing at low interest rates. As markets have shown, if that were the Fed’s intention-which it decidedly is not - the effort would fail because excessive money printing - creating a money supply larger than the quantity of money demanded-would push up interest rates as inflation expectations rose. The Fed’s commitment to price stability remains firm, although markets have their doubts given the rise, since March, of more than 100 bp in inflation expectations that drove yields on 10-year notes as high as 4.00 % early in June. While that interest-rate level is not extraordinary by historical standards, the pace of the rise and its association with higher expected inflation are striking - especially a 59-year low of -1.3 % in the YoY CPI. As recently as mid-March, when the Fed committed itself to purchase $300bn of Treasury securities, yields on 10-year notes dropped sharply from 3.00 % to 2.50 %. A rise of 150 bps to nearly 4.00 %, with 100 bp of that move attributable to higher inflation expectations, certainly sounds an alarm bell that any central bank would take seriously, especially given the extremely negative consequences for the struggling housing sector as mortgage rates rise. Even more significant is the implied loss of confidence in the Fed’s commitment to price stability. The actual risks in the U.S. still tilt more toward deflation than inflation. For now there are three main bulwarks against a rise in U.S. inflation: 1) depressed demand growth worldwide, especially in the U.S., tied to persistent deleveraging by American consumers and banks 2) large and rising excess capacity tied to that sharply lower demand (especially in the traded-goods sector); and 3) finally, and most important, the Fed unshaken and unconditional commitment to price stability. The Fed’s problems and the concerns of holders of Treasury securities would be substantially reduced if the Obama administration showed some signs of concern about the rapid increase in U.S. budget deficit that, in turn, fuels concern about the Fed’s need to accelerate money printing. It would be far better not to force the Fed into a position in which it would have to demonstrate its commitment to price stability by engineering a sharp increase in real interest rates to contain rising inflationary expectations from the federal government’s extravagant debt issuance.

Major indexes wavered within a narrow range as mixed housing and confidence data provided little direction. The S&P/Case-Shiller home price index for May showed a mild improvement from the previous month, rising 0.5%, with 13 of 20 major metro markets showing gains. Prices declined 0.6% in April, indicating the rate of housing price declines is slowing. Consumer confidence data for July dropped to 46.6, down from 49.3 in June, according to the Conference Board. The drop was worse than expected, based on forecasts that showed a decline to 49.0. 2-year Treasuries reversed lower after Tuesday's record auction received weaker demand than the government received last month, bucking gains along much of the yield curve. The U.S. Treasury Department sold $42 billion in 2-year notes to demand that paled with the prior month's auction. The Treasury awarded the notes at 1.08%, down from last month's 1.151%. The bid-to-cover ratio -- which measures bids received to bids tendered -- fell to 2.75 from 3.19 last month



ECONOMIC DATA WITH IMPACT


US durable goods orders for June (13.30 BST), with headline data expected ‑0.6 % MoM and core data 0.0 % vs. +1.8 % (-24.9 % YoY) and +1.1 % in May. But the GM bankruptcy poses a downside risk as the closure of some assembly plants may have hit orders for motor vehicle parts. / (major)

The Beige Book (19.00 BST) should confirm that the pace of economic contraction is slowing and that conditions in financial markets have generally improved in recent months. / (major)

U.K. household borrowing that should show a rise in mortgage approvals (50.0k vs. 43.4k) and a stability in consumer credit in June (09.30 BST).


POSITIVE IMPACTS



AKZO NOBEL : Q2 revenue €3.67bn (3.54bn exp) / Ebit €370m (267m exp) / Outlook and medium-term targets reiterated

BAYER : Q2 sales of €8.01bn (7.95bn exp) / Ebitda €1.71bn (1.61bn exp) / Sees FY sales at €31-32 bn, in line + stuck with outlook of 5% decline in 2009 adj EBITDA / Said downturn is bottoming out, but no sustained improvement in sight …

ARCELORMITTAL : Q2 sales $15.17bn (14.9bn e) / Ebitda $1.2bn (1.17bn e) / Net -$800m (-300m e) due to $1.2bn one-offs / Sees Q3 EBITDA $1.4-1.8 bn (1.9bn e) / Said recovery will remain slow & progressive with selling prices stable or slightly lower in Q3

SANOFI : Q2 sales €7.44bn (7.22bn exp ) / Net income €2.27 Bn (2.06bn exp) / Raises growth forecast to 10% from at least 7% / Targets €2Bn recurring cost saving by 2013

SAP : Q2 sales €2.58bn (2.64bn exp) / EBIT €647m (620m exp) / Improved visibility in H2 / Raises outlook for FY op. margin

BG GROUP : Q2 revenue £3.22bn (3.09bn exp) / Operating £1.26bn (1.1bn exp) / But said 2009 production target of 680K boepd is expected to be achieved over 12 months to 31March 2010, 3 months later than expected…

RANDSTAD : Q2 revenue €2.99bn (3.03bn exp) / Ebita €67m (63m exp) / Said that the US staffing & inhouse businesses as well as its

main European markets clearly show some stabilization… but too early to declare a beginning of recovery

ABB won a $540m order in Brazil for world’s longest power transmission link

ROCHE said EU commission agreed to extended approval of Avastin in advanced (metastatic) breast cancer

SANTANDER is planning to hold an IPO of up to 20% of its Brazil unit within the next 3 months

DSM to sell DSM energy to TAQA / Expects book pft of €275m from the sale

RHODIA : Q2 recurring Ebitda €111m (€89m exp) / Net loss €40m (-47m exp) / Sees sequential improvement in Q3 demand / Remains focus on FCF generation / Q4 demands remains uncertain

EDF ENERGIES NOUVELLES : H1 revenue €413.8m (€391m exp) / EBITDA €140.2m (€131m exp) / Confirms 2009 targets

ATOS : H1 revenue $2.59bn, in line / Confirmed 2009 guidance with positive FCF + higher operating margin

M6 : H1 revenue €378.3m (373.6m exp) / Advertising revenue at core channel down 14.1% / Operating €107.5m (102m exp)



NEGATIVE IMPACTS



PEUGEOT : H1 sales €23.5bn (24.1bn exp) / Operating loss €1.33bn (-1bn exp) / Generated FCF of €467 m due to sharp inventory cuts / Sees European auto market down around 7% in H2 + recovery of European auto market towards end of 2010

STM : Q2 revenue $1.99 bn (1.89bn exp) / GM 26.1% (28.2% exp) / EPS loss $0.28 ex-items (-0.31 exp) / Sees Q3 gross margin 31% +/- 2% (33% exp) with revenue between $2.07-2.27bn (2.02bn exp) / No big drama but GM still disappointing…

INFINEON : Q3 revenue €845m (831m exp) / Net loss €23m (-46m exp) / Sees revenues to grow in the Q4 compared to the Q3 but

expects depreciation and amortization to exceed the previous forecast level of €500 m…

LEGRAND : H1 sales €1.81bn, in line / Operating €242m (265m exp) / Maintained its FY operating margin objective of 14% / Saw some recent encouraging signs such as a bottoming out in U.S. indicators… Read-across SCHNEIDER

BHP agreed with unnamed customers to take a 33-44% price cut for contracted iron ore shipments, covering 23% of its sales volumes

EDF : French Govt would have decided to raise electricity prices mid-Aug. = +1.9% for households, 4% for small Co & 5% for big Co

HMV Group Chief Executive has become the preferred pick to succeed Michael Grade as the chief of ITV (FT)



CEMEX : Q2 revenue $4.19bn (4.4bn exp) due to lower volumes, mainly from U.S. & Spanish ops + unfavorable forex / Ebitda $812m (837m exp) / Net a touch better thx to smaller losses on financial instruments / FCF could be at risk… / Partial read-across LAFARGE…

STEELMAKERS : India's JSW Steel has cut long steel product prices as a result of sluggish demand (DNA Money)




TRADING IDEAS


BUY VALLOUREC (ahead of results friday) / ENI / ROYAL DUTCH / BP / TOTAL to play US energy names reporting this week

BUY NOKIA / GSZ / VIVENDI on reversal head & shoulder

BUY FTE / DTE to play economic recovery + gap above to be close soon


BUY DTE / SELL TEF // BUY PHILIPS / SELL SIEMENS // BUY SAINSBURY / SELL TESCO // BUY AEGON / SELL AXA

BUY MARRIOTT / SELL LAS VEGAS SANDS / BUY RESEARCH IN MOTION / SELL APPLE // BUY DELL / SELL HEWLETT PACKARD


BROKER METEOROLOGY


BBVA RAISED TO BUY FROM HOLD BY S&P

BBVA RAISED TO BUY FROM HOLD BY RBS

BBVA PRICE TARGET RAISED TO 12 FROM 10 BY MORGAN STANLEY

BBVA PRICE TARGET RAISED TO 13 FROM 12 BY NOMURA

HOLCIM RAISED TO BUY FROM HOLD BY UBS

PORTUGAL TELECOM STARTED AT BUY BY ING

NEXANS RAISED TO NEUTRAL FROM SELL BY UBS


HERMES CUT TO UNDERPERFORM FROM NEUTRAL BY CREDIT SUISSE

SSAB CUT TO UNDERWEIGHT FROM NEUTRAL BY JP MORGAN

LEGAL & GENERAL CUT TO SELL BY DEUTSCHE BANK



TUI CFR (COST AND FREIGHT) CUT TO B3 FROM B2 BY MOODY’S


DATA



WTI : 66,7 (-2,59 %)

Eur/$ : 1,4172 (0,03 %)

$ /Yen : 94,25 (0,27 )

10 Yr US : 3,66 ( -2,54 bp)

10 Yr Euro : 3,43 ( -6 bp)


Indices : US close ; Europe close

SOX : 0,20 %;-1,12%

S&P :-0,26 %; -1,09 %

DOW: -0,13%; -0,89 %

NAS :0,39%; -0,78%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -1,05 %; -2,59 %

ENERGY : -1,62 %; -3,05 %

FINANCIAL : -0,31 %; -0,86 %

HEALTHCARE : 0,28 %; -0,01 %

TECHNO : 0,34 %; -1,06 %

TELECOM : 0,04 %; -0,55 %

INDUSTRIAL : -0,29 %; -1,02 %

UTILITIES : -1,46 %; -1,97 %



TO BE COMING



Today

Results :Sanofi Aventis / Arcelor Mittal / Gas Natural / France Telecom / Santander / ACS / Acerinox / Akzo Nobel / Acciona / Infineon / SAP / Atos / Saipem / Maroc Telecom / M6 Metropole TV / EDF Energies Nouvelles sales / Rhodia / Bayer / Daimler / Time Warner / ConocoPhillipsSymantec / General Dynamics / Nissan / Honda MotorNec Electronics / Nomura

Dividend :Stora Enso (€0.20) / GlaxoSmithKline ( GBp 15,55556) / ConocoPhillips ($ 0,47) / Morgan Stanley ($0,05) / Texas Instruments ($0,11)

Events :Unicredit EGM / Eletronic Arts AGM



Thursday

Results : Siemens / L'Oreal sales / Alcatel Lucent / Vallourec / Centrica / Grupo Ferrovia / Air France-KLM / Renault / Repsol / Enel / Royal Dutch Shell / ENI / Vinci sales / BASF / Maurel & Prom / Solvay / Clariant / Air Liquide / Mediaset / HeidelbergCement / Deutsche Postbank / Lufthansa / Dassault Systemes / Telefonica / Abertis / AstraZeneca / B Sky B (BMO) / Capgemini / CGGVeritas / Continental AG / Exxon Mobil / Neste Oil / Kellogg / Goodyear / Colgate Palmolive / Mastercard / Motorola / Walt Disney / Sony / NTT DoCoMo / Nec

Dividend : Bank of New York ($0,09)

Events:



Friday

Results : Total / Schneider Electric / Michelin / Eiffage sales / Ciments Français / Italcementi / Assicurazioni Generali / CNP sales / JC Decaux / PPR / Rexel / Belgacom / SAB Miller / Enel / British Airways / Anglo American / Anglo gold / Chevron / Sun Micro

Dividend :

Events : Singapore Airlines AGM



Monday

Results : US car sales / Metro Group / Linde / Anglo American / HSBC / Barlcays

Dividend :Banco Santander (€0,135234) / KPN (€ 0,23) / Xilinx ($0.14)

Events:



Tuesday

Results :BNP Paribas (BMO) / Beiersdorf / UBS / Givaudan / Statoil Hydro / Electronic Arts

Dividend :

Events:



ECONOMIC DATA PREVIEW



Today in the United-States, watch the release of the Durable Goods orders for June due at 13.30 GMT. The consensus expects a downward revision at –0.6 % after two months progression (+1.4 % in April and +1.8 % in May).

Have a look also at the Fed Beige Book Economic Report due at 19.00 GMT.



Also keep an eye on the preliminary Germany’s inflation rate that is expected to fell below 0 at –0.4 % (YOY) in July (from +0.1 % in June) or the lowest level in at least 13 years. / LC



ECONOMY


United States: Consumer confidence fell in July

The Conference Board’s confidence index among the US consumers fell for the second consecutive month in July at 46.6 from 49.3 in July while the consensus expected 49. The Conference Board’s measure of present conditions decreased to 23.4 in July from 25 the last month such as the expectations for the next six months that fell to 62 after 65.5 in June. The consumers are still worried about their jobs as shown by the proportion of consumers that said jobs are plentiful that dropped to 3.6 in July (the lowest level since 1983) after 4.5 in June and the proportion of people that said “jobs are hard to get” that climbed to 48.1 from 44.8 the last month. These figures corroborate unfortunately that unemployment is about to reach the 10 %. Concerning the incomes, 9.5 % of the consumers think that it will increase in the next 6 months from 10.1 % in June.



United States: CaseShiller Home price Index slightly up in May

The US home prices had their first monthly gain for the first time in three years. The S&P/Case-Shiller home price index rose 0.45 % in May at 139.84 from a 0.5 % decline in April or the first monthly gain since July 2006 showing signs of an upturn. But from a year ago the prices fell by 17.06 % in May (while the consensus expected a 17.90 % decline) and after –18.10 % in April.



United States: Richmond Fed Manufacturing Index climbed in July

The Richmond Fed Manufacturing index that is a survey of the manufacturing sector in the region, rose more than forecast at 14 in July after 6 in June and while the consensus expected 8. The index of overall activity was pushed by stronger readings for shipment and new orders.